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MRF: Tired performance

Dec 24, 2001

The performance of MRF Limited, the market leader in the Indian tyre segment, reflects the downturn in the auto industry. Both sales and profits have nose-dived in light of slowdown in the economy. It must be noted that MRF is a September year ending company.

(Rs m) FY00 FY01 Change
Sales 19,038 17,140 -10.0%
Other Income 55 40 -26.4%
Expenditure 16,408 15,192 -7.4%
Operating Profit (EBDIT) 2,630 1,948 -25.9%
Operating Profit Margin (%) 13.8% 11.4%  
Interest 643 557 -13.4%
Depreciation 1,078 944 -12.5%
Profit before Tax 964 487 -49.4%
Tax 323 170 -47.4%
Profit after Tax/(Loss) 641 317 -50.5%
Net profit margin (%) 3.4% 1.9%  
No. of Shares (m) 4.2 4.2  
Diluted Earnings per share* 152.5 75.6  
P/E Ratio   8.7  

MRF is India’s largest tyre manufacturer with a market share of 22%. The company derives over 95% of its revenues from its tyre business, the rest coming from its presence in toys and paints. It is a key player in the Original Equipment Manufacturer (OEM) segment.

Auto industry in FY01
(% change) Production Sales
Cars -12.6% -7.5%
Multi Utility Vehicle 1.3% 2.8%
LCV's 4.3% 4.5%
M & HCV's -21.5% -21.3%
TOTAL (4 wheelers) -10.6% -7.0%
TOTAL VEHICLES -2.3% -1.9%

MRF's sales fell by 10% to Rs 17,140 m for FY01. While overall four wheeler sales registered a decline of 7% in sales, this was primarily led by a sharp fall in passenger cars and heavy commercial vehicles segment, that account for a bulk of the industry volume. MRF being a key supplier to most of the auto majors was affected by the slowdown.

Also, prices of one of the key raw materials used in manufacture of tyres, carbon black, went up sharply in FY01 due to higher crude prices. Carbon black manufacturers, both in India and globally, raised prices to pass on the increase in costs to the customers. To put things in perspective, Indian Rayon, one of the market leaders in the Indian carbon black industry raised prices by 19% to Rs 27,000 per tonne (US$ 563 per tonne) in FY01. This along with other factors like lower CV demand, competition in the retail segment (domestic as well as imports) has exercised a downward pressure on margins. As a result, operating profit fell by 26% in FY01. The fall in net profits would have been sharper if not for lower interest and depreciation costs.

The prospects for the current year are also challenging. Competition has intensified in the tyre industry with the entry of multinationals like Bridgestone and Michelin. Multinational auto companies, who have presence in India, increasingly prefer these companies on account of their global relationships. There has also been undercutting of prices in recent years in an attempt to boost volume growth. Apollo, for example, had reduced radial tyre prices by almost 25% last year. MRF also has to contend with threats of cheaper imports, which are only going to be cheaper in the coming years. Though passenger car sales have shown signs of improvement in recent months, given the slowdown in the economy, one has to see if volume growth sustains for the rest of the year. However, being a market leader in the tyre segment coupled with its brand equity, MRF is expected to report a improved performance for FY02. MRF currently trades at Rs 659 implying a P/E multiple of 8.7x FY01 earnings.

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